John G. Wright

Money Utopias of the “Welfare State”

Keynes’ Theory of Money and Interest

(December 1949)

From Fourth International, Vol.10 No.11, December 1949, pp.341-345.
Transcribed & marked up by Einde O’Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

The keystone of the “Welfare State” school of economics is John Maynard Keynes’ “neo-classic” or “unorthodox” theory of money. Keynes, the English economist, set down this theory not in his pretentious 1930 work in two volumes entitled A Treatise on Money, but in his book The General Theory of Employment, Interest and Money written in 1936. (All quotations in the text below, unless otherwise indicated, are from this book.)

Keynes starts from the incredible assumption that it is precisely capitalist crises that constitute proof that capitalism is basically a harmonious system of production, capable of infinite expansion of the productive forces, and requiring merely certain reforms, especially in the realm of monetary policy.

According to him, “it is an outstanding characteristic of the economic system in which we live that, whilst it is subject to severe fluctuations in respect of output and employment, it is not violently unstable. Indeed it seems capable of sub-normal activity for a considerable period without any marked tendency either toward recovery or towards complete collapse.” (p.249) This is indeed making a virtue out of necessity! Since capitalism hasn’t and will not collapse automatically and since it was unable to emerge by “normal methods” from the depression of the Thirties therefore it is “not violently unstable,” merely “sub-normal,” and so forth.

This apologist for capitalism then proceeds to conclude that all the troubles of capitalism (its “severe fluctuations”) are in the filial analysis traceable to an antagonism between two forces: on the one side, money-capital and the money rate of interest and on the other, productive capital and its average rate of profit. While calling interest by its name, he prefers to label the average rate of profit as the “marginal efficiency of capital,” or as “the schedule of the marginal efficiency of capital,” or as “rewards.”

This “revolutionary” theory of money starts its analysis by drawing “a clear distinction” between the money rate of interest at one pole and productive capital and its “rewards” on the other. In this connection Keynes affirms two universal laws:

That money as such has a more or less stable and intrinsic rate of interest, which tends to stay at a high level, being “relatively reluctant to fall.”

That just the opposite is true of “rewards” from productive capital which tend to fall as capital-goods grow more and more abundant..

These ideas are not exactly new.

From Proudhon to Keynes

I propose to show that in his basic approach to money Keynes does not differ substantially from other money reformers who also regarded all the evils of capitalism as emanating from money, the lending of money, the “special privileges” of money and the like. More than a century ago, in France, lending appeared to Proudhon as an evil because lending was not selling. He condemned it as “the faculty of always selling the same article over and over, and receiving its price again and again, without ever relinquishing the ownership of the things one is selling.” (Discussion entre M. F. Bastiat et M. Proudhon, Paris 1850, p.9.)

Proudhon derived the powers of money from its scarcity; money is always in short supply and because of this the private owners of money are always able to exact “unearned tribute” from it. Proudhon proposed to do away with interest and money-lending by simply doing away with money through the medium of “labor notes” and the establishment of “Labor Exchange Banks.” (It was actually tried and, of course, pathetically failed.)

As touches productive capital and the private ownership of the means of production, Proudhon looked upon them as an unadulterated boon. It was all a question of simply making capital goods more and more ple.ntiful. We shall presently see just where Keynes is in accord with Proudhon and wherein he differs.

Is it true that money by its innate nature whether from scarcity or for any other reason has its own rate of interest?

Up to the middle of the eighteenth century, this was a commonly held view. It was exploded by the English economist J. Massie and after him by David Hume. They made the discovery, noteworthy for their time, that interest was nothing more than a certain indefinite portion of profit (surplus-profit) accruing to money-capitalists for lending their funds to industrial or commercial capitalists. It was a division of the surplus social product between the different groups of capitalists.

Part of the mystification of money comes from the fact that it antecedes historically the formation of capital. In pre-capitalist societies money owners shared some of the social surplus with the ruling slave-owners or feudalists. In part, this mystification arises from the fact that neither money nor money-capital itself enters directly into the process of production or into individual consumption. Money remains invariably in the sphere of circulation. Within this sphere, there is a special market, the money market where capital is traded as a peculiar type of commodity. The transactions take place exclusively between the capitalists. Money bears interest because it is advanced as capital to the industrial or commercial capitalists, and for no other reason. Interest expresses the specific form of these transactions between the money capitalists and industrial or commercial capitalists.

There is a maximum limit to interest, namely, the average rate of profit extracted by the entire capitalist class from the process of production. But there is no minimum limit. Within short periods of time, rates of interest can and do fluctuate widely in periods of boom and slump alike.

Customs, legal traditions and a whole set of other accidental factors have as much and more to do with fixing interest rates at any given time than, say, the “scarcity” of money or the “competition” between money-lenders on the one side and borrowers on the other.

In the Keynesian system, not alone money but every durable commodity has an interest-rate in terms of itself. There is, Keynes claims, “a wheat-rate of interest, a copper-rate of interest, a house-rate of interest, even a steel plant-rate of interest.” Unlike money, however, the interest rates of such “durable commodities” may be both positive and negative. The money rate always stays “positive.” This is mere casuistry.

“Scarcity of Money”

The “scarcity” of money is the pet obsession of all money cranks in the history of popular economic delusions. They fix their attention only on the breaking points of the economic conjuncture when capital flees from all other commodities which are falling catastrophically in price, and when the universal cry is for “hard cash” or money, the supplies of which seem to have mysteriously dwindled or even vanished. They ignored altogether other periods, no less characteristic under capitalism, when money supplies appear inexhaustible and funds go begging at low interest rates.

Here Keynes becomes indistinguishable from the run-of-the-mill money cranks. If money, says Keynes in all seriousness, “could be grown like a crop or manufactured like a motor car, depressions would be avoided or mitigated because, if the price of other assets was tending to fall in terms of money, labor would be diverted into the production of money as we see to be the case in gold mining countries ...” (pp.230-1)

Announcing it is “impossible to turn more labor on to producing money when its labor-price rises,” Keynes goes on to conclude that the production (and supply) of money is “completely inelastic.”

All this talk about the “impossibility” of “growing” money like a crop or “manufacturing” it like autos, comes down to the same conclusion that Proudhon and others before and after him have drawn, namely, the whole trouble with money is that it is “scarce.” Keynes prefers to call it “completely inelastic.” What a monumental contribution to the “theory of money”!

Money, explains Keynes, “has an elasticity of substitution equal, or nearly equal to zero; which means that as the exchange value of money rises there is no tendency to substitute some other factor for it.” (p.232) To say the “elasticity of substitution (of money)” is nil or virtually nil is an even more highfalutin way of saying that the supply of money is “completely inelastic” or that money is always in “short supply.” It happens to be untrue.

If anything has characterized modern capitalism, it is its tendency to glut the domestic and world markets not only with “surplus” commodities but also with vast quantities of money-capital. In fact, it is the export of capital and not of commodities that is at the bottom of imperialist rivalry for world markets. There is an over-abundance of capital, and there are fewer and fewer outlets for it.

Keynes chooses to ignore this terrible reality in order all the better to chase his Utopian will-of-the-wisp. But reality catches up with him nonetheless and forces him into pathetic self-contradictions.

Having enunciated the proposition that the whole trouble with money is its tendency to be scarce and to remain scarcer, he announces virtually in the same breath that the root of the evil actually lies in an “abundance of capital,” or in “excessive savings” or in an excessive “propensity to save.” What possible meaning can all these strictures against excessive “savings” have, if not the recognition that money and money-capital can be and are piled up to the point of glut? And indeed one of the characteristic features of capital crises is precisely the overproduction not only of commodities but of capital, including money-capital.

On page 220 of his book, Keynes concedes that “abundance of capital” can and does interfere with “abundance of output.” In this connection, the phrase “abundance of capital” cannot possibly refer to the abundance of productive capital or capital-goods, because these in the Keynesian dream-world act only as a spur to the “abundance of output” and “full employment.” He must therefore refer here to nothing else but money-capital, more accurately, finance capital. This is made even clearer in his comments relating to “savings,” for money is indeed the chief medium of “saving.”

Take for example Keynes’ proudest boast that he, a “neo-classic,” believes that savings and investments “can actually be unequal.” This has meaning only in the sense that money-capital (“savings”) may and does tend to pile up faster than industrial or commercial capital (“investments”).

There is, of course, a distinction between money-capital and industrial and commercial capital. There is also a clear antagonism between a lender and a borrower of money-capital. Each fulfills a different role under the capitalist mode of production. Suffice it here to say, that the money lender is clearly parasitic, while the parasitism of the other is masked by the transformation of money-capital in his hands into capital goods, raw materials and the purchase of labor power. But the interest of the one and the profit of the other (average rate of profit less interest) derive from one and the same source the unpaid surplus product extracted from the workers (surplus-value).

Ignores Role of Monopoly Capital

The antagonism between the money-lender (the money capitalist) and the borrower (the industrial capitalist) has been resolved in capitalist practice by the fusion of the two in the guise of finance or monopoly capital. You will not find so much as a whisper in Keynes’ “general theory” about the specific role of monopoly capital today, about its dominance, about its absorption of the lion’s share of “rewards” from all forms of capital. The reality is too naked, too fearsome to face. So Keynes pretends that it is possible to reverse the course of history and, by manipulations of monetary policy, to restore the dominance that industrial capital once enjoyed temporarily over money-capital, and in this way to resume the former high levels of “investments” at home and abroad. A return to the “good old days”: that is the unspoken goal of this “revolutionary” school of economics.

The money rate of interest is “purely traditional,” cried Proudhon and many other money reformers. Keynes subscribes to this superficial notion with both hands.

“There is evidence,” he writes, “that for a period of almost 150 years the long-run typical rate of interest in the leading financial centers was about 5 percent, and the gilt-edged rate between 3 and 3% percent; and that these rates of interest were modest enough to encourage a rate of investment consistent with an average employment which was not intolerably low.” (pp.307-8)

It never enters Keynes’ head that the relative stability of interest rates in the heyday of capitalist development is not at all proof that money has an “interest rate of its own”; it is simply evidence that the average rate of profit over long periods of time had remained relatively stable, thus stabilizing in turn the long-range average interest rates.

With the entry of capitalism into its monopoly or decaying phase, the organic tendency of the rate of profit to fall, manifesting itself as a general tendency, has become more and more pronounced, as was long ago predicted by Karl Marx. Hence also arise the severe periodic convulsions including those of the “money market.”

But Keynes severs money-capital completely from industrial capital. The first, he insists, has remained “most stable.” The second, has declined, both relatively and absolutely.

“But the most stable, and the least easily shifted, element in our contemporary economy has been hitherto, and may prove to be in the future, the minimum rate of interest acceptable to the generality of wealth-owners.” (p.309)

On the other hand, in our century and “presumably for the future the schedule of the marginal efficiency of capital is, for a variety of reasons, much lower than it was in the nineteenth century. The acuteness and the peculiarity of our contemporary problem arises, therefore, out of the possibility that the average rate of interest which will allow a reasonable average rate of employment is one so unacceptable to wealth-owners that it cannot be readily established merely by manipulating the quantity of money.” (p.309)

In plain language this is a bald assertion that the nub of the problem does not lie with the monopoly ownership of the means of production and the sway of finance capital over the whole economy, but is transferred arbitrarily into the sphere of “the minimum rate of interest acceptable to the generality of wealth-owners.”

Origins of the Keynesian Nostrum

There you have the crux of the Keynesian theory of money. As for the cure it is to manipulate not the “quantity of money,” which Keynes forgets is “completely inelastic” to begin with, but the rate of interest, driving it down below its “typical rate” to a desirable “minimum.”

Proudhon, as we remarked, also discerned the root of all evil in money and the “traditional privileges” of money-lenders. He therefore proposed to attack interest by attacking money itself and doing away with it altogether. A latter-day neophyte of Proudhon, one Silvio Gessell by name and German by origin, discerned a “tactical” error in his teacher’s approach. The real trouble lay not in money itself but only in its rate of interest. Gessell proposed to keep money but do away with interest altogether.

Once interest is done away with, then “money power is broken by freed Money. Interest or what Marx called surplus value, is dissolved.” (S. Gessell, The Natural Economic Order, p.9)

How do away with interest? Very simply. All commodities are liable to losses, they either deteriorate or lie in warehouses, subject to storage charges and other vicissitudes of time and fortune, all, that is, except MONEY, whose storage charges are virtually nil. “We must subject money to the loss to which goods are liable through the necessity of storage,” said Gessell and proposed that legal tender be made invalid unless stamped with a monthly tax, approximating 5 percent annually.

This crackpot proposal was greeted with ecstasy during the depression of the Thirties by such eminent scholars as Professor Irving Fisher who declared that, if Gessell’s scheme were adopted, the depression would be dissipated in “two weeks.”

Keynes did not go quite so far. For his part he discerned a tactical error by Gessell. The evil is there to be sure. Keynes cedes to none in his attack on interest:

Interest today rewards no genuine sacrifice, any more than does the rent of. land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for such scarcity, there are no intrinsic reasons for the scarcity of capital ... I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the function-less investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution. (p.376)

But interest can not and must not be eliminated altogether. The really correct and “scientific” thing to do is to slash interest rates to a “minimum acceptable to the generality of wealth-owners.”

With this amendment Keynes incorporated Gessell’s proposal of “carrying charges” or money-tax into his own “perfected” theory of money.

“According to my theory,” explains Keynes, “it [the money-tax] should be roughly equal to the excess of the money rate of interest (apart from the stamps) over the marginal efficiency of capital corresponding to the rate of new investment compatible with full employment.” (p.357)

The correct figure, he assures, should be reached by trial and error.

Except for Keynes’ insistence on the retention of a “minimum” interest rate, the similarity between his and Proudhon-Gessell’s theory of money borders on identity.

The Function of Gold

Keynes, like Proudhon, like Gessell, denied that there is any necessary or indissoluble connection between monetary systems and the precious metals, gold in particular. This is an illusion, worse yet, a pernicious piece of nonsense. Keynes goes so far as to imply that the production of gold (gold-mining) is not only sheer waste but silly. “Gold-mining,” he insists, “is the only pretext for digging holes in the ground which has recommended itself to bankers as sound finance.”

Speaking abstractly, money and the money system is assuredly a highly irrational way of achieving the distribution of the social products of labor. But the irrational system of capitalism cannot divest itself, not even by government edicts, of the only machine of circulation at its disposal. Great amounts of social labor must remain fixed in the only form in which they can serve this machine. The expenses are large, very large, and they increase with the perpetuation of capitalism. As Marx pointed out: “They are dead expenses of commodity production in general, and they increase with the development of this production, especially when capitalized. They represent a part of the social wealth which must be sacrificed in the process of circulation.”

Not any commodity but only a certain commodity, namely gold, can perform the function of money and supply the material foundation for the monetary system under capitalism. Gold thereby becomes more than a mere commodity. Keynes may sneer at gold reserves as the foundation of “sound finance.” Capitalist bankers and financiers cannot afford such lightmindedness.

There is not a single currency in the world today that has remained on “the gold standard,” i.e., is directly convertible into gold. But that does not mean that gold reserves have become meaningless or no longer serve as the material basis of all monetary systems. On the contrary, the balance of international trade payments must still be paid in the final reckoning in gold. “Soft currencies” are soft not alone because of their unfavorable trade balance with the “dollar countries” but, above all, because they lack adequate gold reserves to back up their currencies.

The intimate tie between gold and monetary systems was strikingly illustrated by the recent crisis of devaluation that tumbled in its wake the currencies of 32 countries. It sufficed for mere rumors of higher gold prices in terms of the dollar to send tremors throughout the US fiscal system.

Juridically, the capitalist world today does not recognize the gold standard, but these formal actions of all the governments including Washington weigh as so much chaff in the wind. Gold remains the world money.

Proudhon, and after him Gessell, denied “the Marxian doctrine that the power of capital lies in the ownership of tools of production.” Such ownership is really a boon, and is separate and distinct from “supremacy that is rooted in money.” The more capital is created in the shape of means of production, all the weaker must become the power of the capitalists over society as a whole. With this, too, Keynes is in essential accord. In fact, Keynes expresses in passing the assurance that it is “comparatively easy to make capital-goods so abundant that the marginal efficiency of capital is zero; this may be the most sensible way of gradually getting rid of many of the objectionable features of capitalism.” (p.220) But what actually happens as capital goods become “more abundant”? In the Keynesian dream-world this leads to the dissipation of the power of capital. In reality it has led to the concentration of this power in the hands of monopolists.

A Shamefaced Disciple

It may come as a shock to some people that Keynes is at bottom a disciple of Proudhon. He himself never openly acknowledged it. His followers skip over it in embarrassment. But it happens to be an undeniable fact.

Silvio Gessell introduced a “tactical” correction into Proudhon’s monetary views (center the attack not on money but on its interest rate). Sir John offered an even more trifling amendment to Gessell (center the attack not on money but on part of its interest rate). What is this if not a variation upon a variation of Proudhonism?

Keynes hailed Gessell as a thinker “whose work contains flashes of deep insight and who only just failed to reach down to the essence of the matter [i.e. the theory of money].” But Keynes omits to say that Proudhon was Gessell’s avowed master.

Gessell’s purpose, writes Keynes, was the “establishment of an anti-Marxian Socialism ... and in unfettering of competition. I believe that the future will learn more from the spirit of Gessell than from that of Marx.” But Keynes might at least have added that the spirit of Proudhon has unquestionable priority here so far as both the future and the past are concerned.

Plekhanov used to frequently call attention to the clear distinction between two types of disciples shameless and modest ones: Those who are modest never fail gratefully to acknowledge how much they owe to their teachers. Sir John belongs to the other type those who borrow, more accurately, plagiarize, without any acnowledgment.

Keynes is indebted to none other than Proudhon for the conception that what really limits the expansion of capitalist production is not capitalism itself (i.e. the private ownership of the means of production) but a specific money rate of interest (called “traditional”, by Proudhonists and “typical” by Keynes).

As an avowed disciple of Proudhon, Gessell writes:

“As soon as capital ceases to yield the traditional interest, money strikes and brings work to a standstill.” (Op. cit., p.7)

The shamefaced disciple of Proudhon, Sir John writes:

“Rate of interest of money plays a peculiar part in setting a limit to the level of employment, since it sets a standard to which the marginal efficiency of a capital-asset must attain if it is to be newly produced.” (p.222)

The words may differ, but the idea remains exactly the same. The formulations of Proudhon-Gessell have the advantage that they are expressed in humanly understandable language. Keynes like all his colleagues prefers to operate with academic gibberish. But the whole point is that neither the “strike of money” nor the alleged inability of a “capital-asset” to attain “a standard of marginal efficiency” is in any direct way connected with prevailing money rates of interest. Such a connection or “limit” is sheer fiction.

Fluctuation of Interest Rates

As I have already pointed out, interest rates can stay very low both in periods of depression as well as those of boom. Conversely, the history of capitalism knows periods of high money rates both during booms and depressions. Nor are combinations unknown: that is, money rates may go up and down during depressions as well as during booms; or they may go down in booms and up in depressions, and so on. Anyone studying the gyrations of the money market over a prolonged period can convince himself that there has never been a “traditional” or “typical” money rate. As I stated, it is possible to estimate a maximum which is fixed by the average rate of profit for a given period, but there is no minimum whatever.

If one were to choose a sphere of economic life where accident plays the decisive role, it is in the sphere of the money market. To talk of lawfulness here is to delude oneself and others. It goes without saying, that the “money market” does not lead an independent existence; in the final analysis, developments here, too, are subject to the laws that dominate economic life as a whole. But it has its peculiar characteristics, and these turn out to be just the opposite of those abscribed to it by Keynes and his followers.

Keynes’ money theory, if we observe it closely, is at the same time intended to explain not only “the peculiar attributes of the monetary system,” but also to provide a slick explanation for capitalist crises. Why are there crises under capitalism? In answer Keynes offers up the selfsame “theory of money”:

Unemployment [read: crisis] develops, that is to say, because people want the moon; men cannot be employed when the object of desire (i.e., money) is something which cannot be produced and the demand for which cannot readily be choked off. There is no remedy but to persuade the public that green cheese is practically the same thing and to have a green cheese factory (i.e., a central bank) under public control. (p.235)

No matter how you slice this cheese, it is still Proudhon.

Now Proudhon in concocting his monetary Utopia was at least motivated by a genuine hatred of capitalist exploitation and a sincere desire to improve the lot of the workers. Keynes and his colleagues remain case-hardened champions of capitalism and are impelled by fears of a mass revolt against their outlived system.

“It is certain,” Keynes concedes, “that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated and, in my opinion, inevitably associated with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom.” (p.381)

By “efficiency and freedom,” Keynes means the private ownership of the means of production, the capitalist system as a whole.

His own conclusion is that the monetary reforms and other “encroachments” he advocates are “the only practicable means of avoiding the destruction of existing economic forms in their entirety.” (p.380)

While others have talked about the “Keynesian revolution” in economics and the like, he himself recommended his theory as “moderately conservative in its implications.” After the introduction of all his reforms and “central controls” there will be, in his opinion, “no more reason to socialize economic life than there was before.” (p.379)

In the middle of the last century, Proudhon, the petty-bourgeois Utopian, succeeded in selling many European workers his monetary panacea as the quickest and most painless way of getting rid of capitalism. In the middle of our century the same silly fable, with minor variations, is being swallowed by “labor statesmen” in this country and, what is far worse, being peddled by them to the workers as a guarantee for ushering in the “Welfare State.”